Chapter 7 Flashcards
Where does inflation come from?
increase in money by the Fed
How can consumers spend more money on all goods/services without reducing nominal savings?
the money supply must have increased
What does the V stand for in the equation of exchange?
velocity, the amount of times a dollar changes hands
What is a common sense interpretation of the equation of exchange?
a years worth of output is bought by the money supply which is spent and re-spent ‘v’ times a year
What is the equation of exchange?
M x V = P x Q
What are the assumptions the Simple Quantity Theory rests on?
- over a short period of time resources are limited, so output is limited
- the speed money moves through the economy is limited
What is the prediction of the Simple Quantitttayy theory?
money supply and price are proportionally related. in the short run output and velocity are constant.
Who founded the monetarist school of economics?
Milton Friedman
What are the assumptions monetarism makes about the Equation of Exchange?
the labor market is in equilibrium in the long run, with the amount of labor supplied equal to the amount of labor demanded. output is not fixed.
What is the basic outcome of the helicopter story?
I don’t know
Under what conditions would inflation have zero effect?
if the inflation is anticipated and equally spread
What is a way to avoid being made worse off by anticipated inflation?
buy goods whose prices inflate before inflation starts
T/F, explain. With unanticipated inflation, borrowers win and lenders lose.
True, everyone who has a contract to pay inflated dollars gains while those who receive inflated dollars lose.
What is the Real Interest Rate?
The nominal interest rate minus the expected inflation rate
What are secured loans?
a loan in which the lender can seize the borrowers property if the loan is not repaid (ex. a house)
What are two problems with uneven inflation?
- we don’t know the real worth of goods
2. creates bubbles
What economic school emphasized bubbles?
Austrian School, Hayek, Mises
When someone pays an interest rate to someone, what are they paying that person to do?
to delay consumption
What is the difference between dollars saved and dollars created by the Fed?
dollars saved have the potential to fuel later consumption and dollars created by the Fed do not.
What happens when a Fed created inflationary bubble bursts?
unwanted capital goods and constructions are abandoned and the workers that produced them must find new jobs
Why do the Austrians say the government and central bank create bubbles though private markets do not?
because there must be coordinated failures by many firms and individuals. a government money supplier is the best coordinator for this failure.
What does it mean to monetize the debt?
the Fed attempts to assist the state in its borrowing by purchasing debt in return for dollars
What is inflationary tax?
when the state creates inflation in order to reduce the value of its debt
What was the difference between inflation using gold as $ or $ being used as $? $$$$$:)$$$$$
with gold the inflation is low and with the dollars inflation is high
What was the cause of inflation in the 1960s?
The Fed monetizing the debt to pay for the Vietnam War.
What the heck is a bubble?
money takes some channels more than others and therefore some prices greatly inflate. when the bubble pops, recession happens.
How do cucumbers react if the price of gasoline rises?
- by buying less gasoline (even though they end up spending more on the gas)
- their demands for other goods fall
Can we get inflation from gas prices rising?
No, only the price changes
What do ‘P’ ‘M’ and ‘Q’ stand for?
Price Level, Money Supply and Output produced by the economy
Who are the two economists recognized for implementing the equation of exchange?
John Stuart Mill and Irving Fisher
Who developed the Simple Quantity Theory?
Irving Fisher and Ludwig von Mises
If the Fed. Reserve doubles the money supply, how does the equation change?
when the money doubles, the price level doubles. they are proportionally related.
What does monetarism say about velocity?
it is not fixed but it does not change much
What is the Fed’s objective when they increase money supply?
reduce unemployment
What do the monetarists say about the Fed increasing money supply?
It might boost growth and employment in the short run, but in the long run it will cause inflation
What is the Real Interest Rate?
the actual interest rate that banks expect it to be
What is monetizing the debt?
When the Fed attempts to assist the state in its borrowing by purchasing debt in return for dollars
What is an unsecured loan?
a loan with no backing (credit cards)
What is investment?
Making capital resources
